SRI LANKA RAISES KEY RATES TO 21-YEAR HIGH TO CURB RECORD INFLATION
Nikkei Asia - July 7, 2022
Sri Lanka raised interest rates to the highest level in two decades on Thursday, saying it had to head off runaway inflation to avoid even deeper pain for an economy that is already in crisis and is shrinking.
The Sri Lankan central bank increased its standing lending facility rate by 100 basis points to 15.50% while the standing deposit facility rate was similarly raised to 14.50%, the highest since August, 2001.
Inflation touched a year-on-year record of 54.6% in June, and central bank Governor P. Nandalal Weerasinghe said it could go as high as 70%, prompting the central bank to raise rates to address the rise in prices.
"We will work to manage inflation as much as possible but other measures such as cash transfers will also be needed to give relief to the poor," he told reporters.
Interest rate rises, however, would further dampen economic growth in the island nation.
The country is struggling to pay for food, medicine and fuel, with foreign exchange reserves at a record low. The economy contracted by an annual 1.6% in the first quarter and is forecast to have shrunk more in the second.
Sri Lanka is pushing for a possible $3 billion extended financing program from the International Monetary Fund (IMF) which would help it unlock other bridge financing options to pay for essential imports.
The central bank said in a statement that significant progress had been made in talks with the IMF, while negotiations are underway with bilateral and multilateral partners to secure bridge financing and ease the shortfall in reserves.
"One recommendation in the IMF program is to support the poor and vulnerable as high inflation will have the most impact on them," Weerasinghe said.
The central bank expects inflation to touch 70% in the near term and stay higher for another year but a fall in global crude and commodity prices may help bring it down sooner, he added.
